Risk Management in Context
That construction experts or professionals need to underscore the importance of the need for risk management is a fact. In so doing, the said professionals are required to know the golden balance between financial, contractual, operational as well as organizational requirements with particular relevance to the project at hand. This is especially important since it facilitates the identification of risk in addition to the required risk analysis. According to Winch, (2010), risk management involves the process of identifying all the construction related risks as well as their exposures. On a positive rejoinder, Mubarak, (2010), argues that the said process is especially important in the formulation of effective strategies of managing such risks.
This step carries with it the merit of enabling the project construction manager to be able to formulate responsive mitigation approaches to avert the otherwise potential losses. Rojas, (2009), defines the risk management as to being the practice or act of actually dealing with the harmful event, otherwise known as risk. Hence, it involves the process of planning by the construction manager for the risk and going a step further to identify or asses all the risk related issues that emerge from the respective construction project.
From the two definitions, it is evident that the term risk management has been construed to mean the entire process of planning for these events by the construction manager followed by the actual analysis. This is also then followed by the processes of mitigation as well monitoring of the said risks. What is then the true meaning of the term ‘risk’ as is in the context of project construction management? According to Rojas, (2009), this term implies any chance of the occurrence of an undesirable event in addition to all its consequences in relation to its possible outcomes. Another school of thought as argued by Reck, (2006), defines the term risk as the process of measuring the possibility or probability as well as the consequences of the desired goal of a given construction project not being met. However, irrespective of which divide one may choose to be, the two definitions bring to the fore the general consensus that this term indeed carries with it an element of uncertainty. In this regard, it is of importance to note that when considering any risk within the confines of a construction project, damages or consequences attached to actual harmful event (risk), ought to be considered as well. Majority of construction professionals agree however that more often than not, this is not an easy process owing to the fact that probability; as well as consequence of such occurrences are not easily measurable parameters.
Mubarak, (2010), holds the view that many construction experts have tended to look at construction related risks in isolation. Hence, they end up not realizing the full or potential impacts of the other closely related risks which may in turn have adverse effects on their respective business ventures. Against such back drop, it is imperative for project construction managers or experts to embrace a holistic approach to the whole issue of risk management. According to Reck, (2006), the probability of mitigation of these risks is usually increased, with the final objective being the elimination of such risks in totality. Perhaps it is important to define what really constitutes the risk area in any construction project. This area includes construction risks as well as exposures, and the construction defect mitigation among others. As it has been stated above, the identification of these areas is important to the construction professionals since it enables them to come up with appropriate responsive strategies in order to reduce, mitigate or eliminate these risks in any construction project.
Logical Process of Risk Management
From the outset, it is perhaps to emphasize that the process of risk management, just as the construction phase of a given project, is very crucial for its success of any management project. Therefore, the process of identification of the construction related risks demands the formulation of logical and concise risk mitigation strategies (Lock, 2004)). More often than not, this process entails the use of logical steps by any given construction manager. Hence, this would enable the construction professional to clearly identify these risks (what is most likely to go wrong), minimize their associated impacts, (in terms of what can be done about the identified harmful events before the actual commencement of the construction project), manage the said risks by coming up with proactive response strategies with particular focus on the most likely risk related events (contingency plans). In order to achieve all of the above, the construction manager would also be required to avail the requisite funds that would be used to cover such risks in the likely event that they occur before and during the project lifespan as it has been put forward by Loosemore, (2000).
Owing to the fact that it is extremely difficult for any project construction manager to identify all the variables involved in the process of risk management, the logical process of identifying such risks has been termed as to being ‘fuzzy’. This term has been coined about since risk management, in most cases, entails that identification of vaguely but intertwined probable harmful events in any construction project. Indeed, many scholars have in the recent past agreed to the fact that the logical process of risk management in any construction project usually revolves between false and true variables. One notable merit of the fuzzy logical approach in the process of risk management is that it provides room for partial truth as well false which thus allows the managers to predict the occurrence of undesirable events during the lifespan of a given construction project. Thus in a much broader sense, the logical process of risk management involves the entire process of identifying the uncertainties or the actual undesirable events (risks), according to Loosemore, (2000). Furthermore, this process, entails the holistic analysis of the above uncertainties in the context of their implications; both collectively and individually. This would then be followed with the project construction managers or professional coming up with all the necessary response with the primary goal of reducing the risks to their bare minimum or elimination all together. However, in order to achieve these goals, the importance of putting in place contingency measures can not be overlooked in this regard.
It is clear that this process would require sufficient resources to facilitate for the formulation and creation of proactive contingency measures. Burtonshaw-Gunn, (2009), argues that in the event that the said contingencies have been managed realistically, this logical process should result to the following benefits to the project manager. First, the manager would be assisted to improve on the planning aspect of the project. This is usually brought about due the fact that the construction manager shall be best suited to come up with a range of ‘what if’ questions in relation to the undesirable events. The other notable benefit of this logical process, in terms of realistic management of uncertainties, is that it allows for the generation of a range of imaginative responses by the construction project manager. In addition, it would also enable the manager to have greater confidence as far the entire project estimation is concerned. Lastly, the realistic response to these undesirable events provides for the opportunity for the professionals to be encouraged in formulating suitable contingencies. In this way, the professional is allowed space and time to also come up with strategies on how such contingencies would be considered and eventually managed.
The said logical process of risk management has been cited to be especially important to all the stakeholders of construction project. This has been attributed to the fact that it actually necessitates for discipline by both the project manager as well the would-be customer in the long run. This has been enabled since one shall be able to clearly predict the true consequences of any delayed decision, changes in any requirements alongside the failure to meet the stipulated deadline. Hence, appropriate penalties or incentives would be devised to ensure for the use of estimates based on a given fixed plan; whereby the actual contingency use as well as allocation of resources would be regulated in line with project goal. An integral component of logical risk management is the process of risk reduction as it has been presented by Winch, (2010). This can be achieved through the use of additional information obtained during and or before the commencement of the construction project. This can then be supplemented by the performance of additional simulations or tests with particular focus on the undesirable events. The construction project manager is also called upon to set aside additional resources that would be used for the task of risk reduction. For the success of risk reduction, it would also be vital for the construction project manager to underscore the value of improved communication as well as sound management of all the organizational interfaces.
In any construction management project, the importance of risk identification can not be overlooked. This stage is especially important since it enables the investor to decide as to whether it is worth venturing into the identified construction project. Having evaluated the risks so far identified, the investor is then left with the choice of sanctioning the construction project. However, this decision is usually founded on the cost-benefit analysis; in which case the identified risks play a rather important role. According to Albahar and Crandall, (1990), for any construction project, risks are usually brought to the fore during the feasibility or project appraisal phase. During the said phase, the investor would be presented with the option of weighing the alternatives in relation to the risks so far identified and eventually assessed. The decision to abandon the construction project is usually founded on whether the identified risks would be so grave that the project would not be able to withstand them in the long run.
In most cases, the process of risk identification is carried out alongside risk assessment to bring to the fore the actual impacts of the risks in the event that they occur. In this way, the process of risk assessment would entail the identification of such risks in the first place. The process of risk assessment has in most cases been based on the traditional methods used in the construction sector or industry. These methods have tended to use the probabilistic methods for both identification and analysis. As noted by Burtonshaw-Gunn, (2009), these methods demand that any variables in the construction projects ought to be mutually exclusive or independent conditionally. This has proved to be difficult in most cases since the construction projects tend to have a number of variables; which in most cases are usually difficult to delineate from one another. The identification of risks often demands for a thorough investigation into the uncertainties which are closely associated with the construction project. Risk identification requires the manager to collect all the relevant information that would be used in the generation of imaginative responses. Such responses provide the crucial link between the problems and possibility of reducing the risk. In a nutshell therefore, risk identification involves the process of determining the types of risks; in terms of nature that would negatively affect the construction project. In so doing, one would also have to document their respective characteristics.
Classification of Risks
From a broader spectrum, risks can be grouped into operational, technical and business risks. Reck, (2006), holds the view that a technical risk results from the inability of the project construction manager to complete a product which would otherwise meet all the customer expectations. Simply put, this risk result would result to project manager’s incompetence to meet the consumer requirements. An operational risk on the other hand would be brought about the inability of the would-be client or customer to work with the other primary project team members. Within the context of construction projects, all the two types of risks are business in nature; and may thus be acceptable or unacceptable. The former type of risk is the one that would affect the construction project on the not-so critical frontier. An unacceptable risk is the one that has an effect on the critical elements of the projects.
Winch, (2010), holds the view that these risks may be long term or short term in nature. The latter type of risk usually has immediate impacts; for instance, change in the requirements of any deliverable for the construction project. Long term risk effects are somewhat distant in terms of occurrence in both time and space. Furthermore, risks in construction projects are either manageable or unmanageable. A manageable risk is usually that which can be accommodated and thus both the manager and the customer can live with. The other type of risk is however difficult to accommodate; owing to its grave consequences in the long run. Loosemore, (2000), provides a positive rejoinder by stating that these risks might also be either external or internal. In this regard, an internal risk is the one that is unique to the construction project, for example being unable to secure vital parts for a building during construction. External risk on the other hand would refer to those that are evidently beyond the scope of the construction project; for instance when the management suddenly opts to reduce funding towards the project by 30 percent. Some of the notable sources of the afore mentioned risks in a given construction project are as follows; changes in design or errors, poor coordination during the project work and the use of unskilled staff. In addition, poor definition of work roles, legal or political problems as well as natural hazards would also result to either of the above stated risks. Misunderstanding of the terms of the contract and its related working conditions is the other cause of risks to any construction project.
Tools and Techniques for Risk Management
The identification and eventual assessment of any risk would bear no fruit on the success of the construction project in the event that the use of appropriate tools and techniques for its management is ignored. The process of risk management usually begins after risk identification and cascades all the way to the risk response itself. According to Loosemore, John and Charles, (2006), risk management entails all the measures that are put in place to respond to the risk doing or before the commencement of the construction project. Upon risk identification, the process of risk management begins with the quantification of such risks. One of the tools of risk quantification is by the use of the expected monetary value. This is usually derived from both risk event probabilistic calculations and event loss or gain estimates. The second tool of risk quantification is through the use of statistical sums; which is obtained from the project costs in relation to the individual items of the construction project. The use of simulations as well expert judgments are the other tools for risk quantification. Simulations are used to provide a model which is then used to analyze true performance of construction system. The most widely used method for simulation in the field of construction management sector is the use of project networks. Statistical sums on the other hand entails that uses a range of project variables to calculate the total project costs in relation with the expected monetary costs (Simon, Hillson and Newland, 1997).
After the quantification of risks, the construction professional is usually expected to come up with risk response approaches and development. This mostly involves the use of a number of a techniques or tools. One of such techniques is the use of procurement which entails the acquisition of services or goods for the immediate response to the needs of the projects occasioned by the risks. Smith, Tony and Paul, (2006), argue that procurement results to the exchange of risks in an attempt to manage the risks. Apart from the above, contingency planning is the other technique for responding to construction risks. This involves the definition of the steps which would be taken to address risk in the event that it occurred. Closely related to the use of this technique for risk response, is the use of alternative strategies. This entails changing the planned approach in order to respond to a probable risk. The use of insurance is the last technique of responding to risks in the event of occurrence. Insurance has been known to provide a sound framework for both response and management of any risk especially in the project construction sector. The final and all- important stage in the process of risk management involves the formulation of response strategies.
According to Diekmann, (1992) and Kelly, Steven and Drummond, (2004), this stage encompasses five approaches or techniques. One of such strategies available to the project would be accept the risk in the first place. This strategy calls upon the project manager to fully understand the risk in terms of its consequences and probability of occurrence, before deciding to do nothing about it. In this way, the construction project is usually left to respond or react to it especially if the anticipated risk is relatively minimal in terms of effects to the project. The second strategy would be to avoid the risk all together. This usually entails omitting certain elements of the construction project. However, it is imperative to note that changing the scope of any construction project might adversely affect the project’s revenue turnover or benefits. The third strategy would be to monitor the risk while at the same time preparing a contingency plan for it. This technique involves the selection of a given predictive indicator and closely observes the project as it approaches the identified risk point. The fourth technique used for risk management is the transfer of the risk. This is normally facilitated by the use of insurance in which case the project transfers some of the risks in form of insurance cover for the same. This technique has the benefit of enabling the construction project to recover to its original or desired position in the event of occurrence of the risk. The last technique for risk management is the mitigation in which case the project manager formulates responses to the impact of the risk on the construction project, according to Albahar and Crandall, (1990).
Methods for risk identification in construction projects
There is the general agreement that risk identification is not done once but rather throughout the life cycle of the construction project. According to Winch, (2010) and Rojas, (2009), risks can be identified through a number of techniques. One of such tools is through the use of brainstorming in which case, the construction professionals discuss the potential risks from a given project. The other technique is the use of workshops. Just like brainstorming, this strategy allows the professionals to discuss the likely risks with all the concerned stakeholders. The use of questionnaire surveys and interviews are the other techniques that would be used for the identification risks in construction projects according to Loosemore, John and Charles, (2006). In addition, use of feedback from other closely related construction projects might be used to identify risks. Furthermore, previous experiences as well as input from specialists are the other risk identification methods in the said projects. In the context of construction project context, risk identification overlaps to the process of delineating opportunities as well threats from the project. In this case, such opportunities would be the positive outcomes with the threats being negative outcomes from the construction project.
Risk analysis has also evolved to become an integral aspect of risk management. According to Simon, Hillson and Newland, (1997), the UK Association for Project management, Risk analysis and Risk management (i.e. PRAM), stipulates that the said phase entails the study and subsequent organization of risks with particular reference to a given construction project. Risk analysis is important since it facilitates for the successful complementation of any construction project. This is usually captured in terms of time frame, costs in addition to the expected performance upon completion. The process of risk analysis is further grouped into two sub-categories; namely quantitative and qualitative modes of analysis. Qualitative analysis encompasses the identification as well as recognition of all the risk related factors. In most cases, this is supplemented by conducting a detailed risk assessment. Hence, each risk is usually described in exhaustive in terms impact and its nature. Quantitative risk on the other hand provides assistance to former type of risk analysis since. This is due to the fact that it focuses on coming up with a range of ways of clearing doubts that related to the time or cost estimates; in addition to the professional’s doubts as argued by Kelly, Steven and Drummond, (2004).
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